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IBC 2016 | Avoidance of transactions

Section 48: Orders in Cases of Undervalued Transactions

Section 48 of the Insolvency and Bankruptcy Code, 2016 specifies the types of orders the Adjudicating Authority may make following an application under Section 45(1) concerning undervalued transactions by a corporate debtor.

Key point: Section 45 identifies undervalued transactions and enables an avoidance application. Section 48 specifies four possible remedial directions. The Adjudicating Authority may tailor the relief to the transaction and the evidence.

Section 48 - Statutory provision

The order of the Adjudicating Authority under sub-section (1) of Section 45 may provide for the following:

  1. Vesting of transferred property: Require any property transferred as part of the transaction to be vested in the corporate debtor.
  2. Release of security: Release or discharge, in whole or in part, any security interest granted by the corporate debtor.
  3. Repayment of benefits: Require any person to pay such sums in respect of benefits received by that person to the liquidator or resolution professional, as the case may be, as the Adjudicating Authority may direct.
  4. Payment of consideration: Require payment of such consideration for the transaction as may be determined by an independent expert.

The four clauses above preserve the substance of the statutory provision reproduced on the original webpage, presented with descriptive labels for readability. Consult the official legislation for authoritative wording and amendments.

Meaning and purpose of Section 48

The purpose of Section 48 is to address the consequences of transactions that have transferred value away from the corporate debtor for no consideration or for significantly inadequate consideration, where the legal conditions for avoidance are met. Rather than prescribing a single outcome, it gives the Adjudicating Authority a range of restorative measures.

These remedies may help restore assets or economic value to the corporate debtor's estate for the benefit of the insolvency resolution or liquidation process. The precise relief depends on the facts and the order made by the Adjudicating Authority.

Four types of orders explained

1. Return or vesting of property - Section 48(a)

Where property has been transferred in an undervalued transaction, the Authority may direct that the property be vested back in the corporate debtor. This is an asset-restoration remedy; its practical implementation depends on the nature and status of the property and the terms of the order.

2. Release or discharge of security interest - Section 48(b)

The Authority may release or discharge a security interest created by the corporate debtor, either wholly or partly. A security interest broadly includes a right, title or interest in property created to secure payment or performance of an obligation, as defined in Section 3(31) of the Code.

3. Recovery of benefits - Section 48(c)

A person who has received a benefit from an undervalued transaction may be ordered to pay an appropriate sum to the liquidator or resolution professional. The amount and recipient are determined by the Authority's directions; recovery is not automatic merely because an allegation has been made.

4. Consideration determined by an independent expert - Section 48(d)

The Authority may require payment of consideration for the transaction as determined by an independent expert. This option can address a value shortfall without necessarily requiring the return of the asset itself. Section 46(2) also empowers the Authority to require an independent expert to assess evidence relating to transaction value.

Important legal definitions

  • Undervalued transaction: Under Section 45(2), a gift or a transfer of assets for consideration significantly below the value provided by the corporate debtor, where the transaction is outside the ordinary course of business.
  • Corporate debtor: A corporate person who owes a debt to any person, as defined in Section 3(8).
  • Resolution professional: The insolvency professional appointed to conduct the corporate insolvency resolution process in accordance with the Code.
  • Liquidator: The insolvency professional appointed to conduct the liquidation process under the Code.
  • Adjudicating Authority: For corporate persons, the National Company Law Tribunal (NCLT), as provided in Section 5(1), read with Section 60.
  • Security interest: A property interest securing payment or performance of an obligation, subject to the full statutory definition and exclusions in Section 3(31).

How Sections 45 to 48 work together

  1. Identify the transaction: Examine whether the transaction falls within Section 45(2), including its ordinary-course qualification.
  2. Check the relevant period: Section 46(1) provides a one-year look-back for transactions with any person and a two-year look-back for related-party transactions, each measured before the insolvency commencement date.
  3. Apply to the NCLT: Under Section 45(1), the resolution professional or liquidator makes an application for avoidance and reversal of the transaction's effect.
  4. Consider creditor or member action: Section 47 separately addresses applications by creditors, members or partners where the professional has not reported an undervalued transaction, subject to its statutory conditions.
  5. Determine appropriate relief: Where relief is warranted, the Authority may issue an order of the kind set out in Section 48.

Illustrative example

Assume a corporate debtor transfers equipment with an independently assessed value of Rs. 40 lakh for Rs. 5 lakh outside the ordinary course of business, during the relevant statutory period. If the transaction is found to be avoidable under Section 45, the NCLT may consider ordering the return of the equipment under Section 48(a), or requiring appropriate consideration determined by an independent expert under Section 48(d). This is a simplified illustration, not a prediction of any particular order.

  • Section 43: Preferential transactions and relevant time - a distinct avoidance ground.
  • Section 45: Avoidance of undervalued transactions - the basis for the application addressed by Section 48.
  • Section 46: Relevant period for avoidable undervalued transactions and independent expert assessment.
  • Section 47: Application by creditor, member or partner in specified cases of unreported undervalued transactions.
  • Section 49: Transactions defrauding creditors - additional consequences where the statutory intent is established.
  • Section 60: Adjudicating Authority for corporate persons and its jurisdiction.

Official legal sources and further reading

This article provides general legal information. The applicable statute, amendments, regulations and binding judicial decisions should be checked for the facts and date of a particular matter.